Transcript: Nightly Business Report – August 1, 2017

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Apple on Wall Street’s eye. A strong quarter sends shares of the tech company to a new record after hours. What’s next?

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Split decision. There’s a widening divide between investors who think stocks are vulnerable and others who absolutely don’t. So, what should you do when Wall Street can’t agree?

HERERA: And a growing threat. As the tension mounts between the U.S. and North Korea, possibly economic hazards are starting to become more clear.

All that and more for Tuesday, August 1st.

MATHISEN: Good evening, everyone, and welcome.

So, how do you like them Apples? Apple’s CEO Tim Cook is a modest sort, but tonight, no one would criticize him for crowing. That’s because the King of Cupertino, Apple, shut down the worrywarts and beat profit and revenue estimates and — oh, yes, the company sold more iPhones than expected, too.

Here are the big numbers. Apple earned $1.67 a share. That’s a full dime ahead of Wall Street’s forecast. Sales rose 7 percent to a shade below $45.5 billion or about a half billion a day.

The company even grew its enormous cash reserves 13 percent to $261 billion. Shares took off after the numbers came out. Pushing them to an all time high.

Josh Lipton has the biggest takeaway from Apple’s big quarter.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Forty-one million. That was one big number in Apple’s latest earnings report. Refers to the number of iPhones that Apple shipped in the quarter and it was better than expected. Analysts thought Apple would ship 40.7 million units in the quarter.

I did have a chance to speak briefly with Apple CEO Tim Cook. He says the demand was actually better than those shipments indicate because he took down iPhone inventory by more than 3 million units in the quarter. He also says there is some pause going on here. In order words, consumers aren’t buying iPhones right now because they’re waiting for that new iPhone to come out, which we all expect in the fall.

For NIGHTLY BUSINESS REPORT, I’m Josh Lipton, Cupertino, California.

(END VIDEOTAPE)

HERERA: So, let’s turn now to Timothy Lesko for more on Apple’s earnings and what he sees for the company. He’s principal portfolio manager at Granite Investment Advisors.

HERERA: Let’s start first of all with Apple itself from a stock performance. It did hit a new all time high. You’re still bullish on the stock, though.

LESKO: Right. We –you know, when we look at stock, we look at what we its fair value is. And we feel it’s been trading at a discount of that fair value really for a long time. So, you know, trailing earnings like we saw today are a nice validation of the opinion that we’ve had, but it doesn’t mean that there’s not more earnings to come, perhaps more stock appreciation.

MATHISEN: It’s up 41 percent in the past year. It sits roughly at $150 share. Where do you see it a year from now? What’s the upside here?

LESKO: Well, the upside even if Apple doesn’t earn a whole lot more in earnings per year than they’re earning right now, it still trades at a discount to the market as a whole. You know, part of your lead in was the discussion about the difference between investors who think the market is overvalued and investors who think that the market is just fine. Apple really stayed within that just fine valuation for some time. So, if you just put a market valuation on Apple, you could see another 10 percent or 15 percent in the stock.

HERERA: So, as you look at this earnings report, what impressed you the most? And where does Apple, if any were at all, need to improve?

LESKO: Well, I think what impressed us the most were the reacceleration of Mac sales and iPad sales, you know, after a really, nearly a five-year decline in the category and they introduced some new products in the spring that really seem to be gaining some traction.

And if you look forward, what we really see Apple as rather than just an iPhone sales vehicle is a company that allows you to manage your digital life, whether it’d be your social media, your photos, your Internet access, your e-mail, really, whatever it is, and there are a lot of different devices you have to choose from to use. And really, Apple wants to be — call it — front of mind for the high-end consumer.

MATHISEN: Is there any — you know, a lot of manufacturing, let me come at this a different way. There was a time when Dell was the king of the world. There had been times when IBM was the king of the world. And other manufacturers of computers or phones, Nokia comes to mind, that they were very, very good.

Could Apple conceivably get displaced?

LESKO: I think that’s a great point, Tyler. If you look at IBM and Dell, they were really selling based on the low margin computers where somebody else was making the operating system. Nokia’s probably a better example, where Nokia with the system they had for cell phones really opened the cell phone market before the iPhone came along, and they saw you know, nearly 80 percent, 90 percent kind of market share go to, you know, next to nothing now. And that probably is the big risk.

MATHISEN: Or BlackBerry. BlackBerry, too.

LESKO: Right. Or BlackBerry for that matter, and I think the real key is in the software. Yet everybody pays so much attention to the hardware.

If you just turn to hardware for a second, Apple since its infancy has always maintained a higher margin on its computers because they believe in vertical integration, while everybody else was just making, I call it, beige boxes supporting other people’s software.

HERERA: Their innovation is evolutionary. It doesn’t always have to be revolutionary.

LESKO: Absolutely, and I think you’ve seen that in the iPhone since its inception. There were other touchscreen phones. There were other music players before the iPod. Apple just took a device and a need and made it many much more consumer-friendly.

So, if you look at the magic of Apple, it’s really their ability to read how people work and how people want to work.

MATHISEN: Well, stocks closed the first day of August, which is usually not such a great month, but today, closing at another all time high, the Dow’s 31st record close of the year. But it didn’t have quite enough steam to break that 22,000 mark.

The Dow closed up 72 at 21963. Check back tomorrow because the Apple number may shoot it before 22 grand. The Nasdaq added 14. The S&P 500 tacked on six.

HERERA: And the president took to, where else, Twitter this morning, to tout the fact that the Dow is in rarefied air. He tweeted: Stock market could hit all time high again, 22,000 today. Was 18,000 six months ago on Election Day. Mainstream media seldom mentions.

MATHISEN: But while we sit at record levels on the Dow, there are growing divergences on Wall Street, from strategists’ opinions to where the money is actually going. The splits on the street are starting now to become very pronounced, very obvious.

Bob Pisani takes a look.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The markets continue to climb to new heights, but there’s a series of divergences occurring that give investors pause for the month of August.

First, a notable divergence between the Dow Industrials, which were up 3 percent in July and the transport, they were down 4 percent in July. This is after the transports hit new highs. So, these stocks were lower across the board, whether we’re talking b about planes, trains or automobiles.

What’s going on? Well, you can only stretch your rubber band so far. For transports, there’s some disappointment about the Trump agenda mixed in with better opportunities overseas. There’s also lower business from key sectors like retails, autos and oil that the transports depend on. Throw in some issues around pricing and you got reasons for a divergence.

Now, under Dow theory, remember, when the transports significantly strayed from industrials after hitting new highs, it’s considered a negative for the markets. There’s the bigger issues. The major indices are at new highs and strategists are split over the direction of the markets for August.

The bulls are touting strong corporate earnings, that’s true, low interest rates and a synchronized global recovery as reasons for the rally to roll on. But bears are concerned about rising stock price, record low volatility and central banks that could rein in stimulus.

There’s even a growing divide over exactly where the money is going. So, for example, exchange traded funds or ETFs have now topped $3 trillion in assets after seeing huge inflows last month. In fact, ETFs held $1 trillion more than hedge funds for the first time ever. That means lower costs ETFs are winning out over pricier rivals. Passive indexing better than ever.

For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: So, what should you do when Wall Street is divided over the future of the stock market?

Tim Maurer is director of personal finance at BAM Alliance and he joins us now to talk more about that.

Nice to have you with us, Tim. Welcome back.

: Great to be here.

HERERA: There’s always kind of a divide. I mean, that’s kind of what makes the market. You have some people who are bullish. Some people who are bearish.

However, when you get a divide like we’re starting to see on Wall Street, what should the individual investor do?

TIM MAURER, DIRECTOR OF PERSONAL FINANCE, BAM ALLIANCE: Well, the individual investor should do virtually nothing. You’re right. This is a natural part of the market process. There’s always going to be a buyer. There’s always going to be a seller.

It’s not even just a zero sum game. It’s a negative sum game, because somebody’s going to be losing. Someone may be winning some.

But then there’s also the cost of the investment. And that’s one of the reasons we also shouldn’t be surprised about seeing opposing forces at the same firm. Wall Street has often been on both sides of the transaction, because they’re selling investment products that benefit from being on both sides of those transactions.

But what we need to remember, what you need to remember as an individual investor is your financial plan, your investment plan, not necessarily the plan of these bigger corporations.

MATHISEN: You know, I have very good news, Tim. Since the last time we spoke, I have learned how to tie my own bow tie. How do you like that? You promised me you’re going to give lessons, but —

(LAUGHTER)

MAURER: Oh, congratulations, Tyler. So glad to hear that.

MATHISEN: I was speaking last night with a financial adviser who went to the point you just made, and that is, he says that what you need to pay attention to is what your baseline allocations are — domestic stocks, international stocks. Let’s say you have 20 percent targeted for international stocks. When that number goes down to 17 percent, you would then add more. If it goes up to 23 percent, you would trim back.

Is that a good, smart — whether it’s up 3 percentage points or something else, is that what you need to keep in mind?

MAURER: Absolutely, and that’s why I tell people, so it’s not just an action. It’s not that you set it and forget it forever, Tyler. When we see these market moves, when we hear these loud voices on Wall Street, honestly, it’s often a good sign that we probably should be going back and taking a look at our portfolio. We shouldn’t necessarily do what they say.

But I absolutely invite investors to take a look at rebalancing. If you have a plan in place, if you know it’s a good, solid allocation, then that is the work of the investor to go back in times where the market goes up a lot or goes down a lot, and make that reallocation, taking from the winners if you will and giving to the losers so that you can benefit from the next upswing in a different allocation.

HERERA: Does it make a difference with the market at all time highs and near the round number for the Dow, anyway, of the 22,000 mark? Should that matter to an individual investor?

MAURER: Well, here’s the funning thing. If you own an asset that continually goes up, that you expect should make money over time, we should reasonably expect it to reach its all time high quite often. Hopefully so, right?

I mean, don’t get me wrong. I absolutely do expect that we could see a correction. We may even be overdue as it were. But one of the things that I’ve learned in my 20 years in this business and working with individuals in investing is this — we don’t know when it’s going to happen.

HERERA: Right.

MAURER: Active investors have proven over 95 percent wrong over time. So, sure, you can give it your best shot and try to be in that 5 percent or you can stay on the side of probability, stay invested with a good allocation.

MATHISEN: Auto sales shifted into a lower gear in July as the industry wrestles with a slowdown in demand and it’s a pronounced one. Overall, sales fell down 7 percent to an annualized pace of $16.7 vehicles. That’s down more than a million from a year ago.

Phil LeBeau has more on the summer slowdown in the showroom.

(BEGIN VIDEOTAPE)

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Summer is traditionally the busiest time of the year for auto dealers, but in July, sales cooled off, with General Motors reporting a 15 percent drop in sales as the big three all reported weaker than expected business. Toyota bucked the trend with positive sales, fueled in part by solid demand for crossovers and SUVs.

But in general, dealers are taking longer than ever to sell new vehicles. In fact, Edmunds.com says it took an average of more than two and a half months to sell a car or a truck once it got to the dealership, the slowest turnover rate since 2009.

What’s hurting business? In reality, Americans have bought so many new vehicles over the past seven years, there’s just not as much demand. Meanwhile, there’s a glut of cars coming off lease that are driving down used car prices, especially on three and four-year-old models that have relatively low mileage and are still in pretty good shape.

As a result, automakers are wrestling with how much they can cut production and in some cases, whether to phase out some slower selling models. For example, Cadillac is rebalancing its lineup of cars to better meet demand. That will ultimately mean it offers one fewer model.

(on camera): There is one thing that’s helping automakers right out this slowdown in sales. It’s the fact that trucks, SUVs and crossovers are still relatively strong and those are the most profitable vehicles in the dealership.

Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.

(END VIDEOTAPE)

HERERA: Coming up, why limited options in dealing with North Korea crisis could come with a big economic cost?

(MUSIC)

MATHISEN: Some data points out today on big parts of the economy. Consumer spending slowed a bit in June as personal income was stagnant. June income was unchanged, marking the first time in seven months there wasn’t a rise. It’s a key number, of course, since consumer spending makes up more than two-thirds of U.S. economic activity.

Separately, activity at the nation’s factories in July continue to expand, but was slightly below expectations. Manufacturing counts for about 12 percent of the economy. One area of concern, construction spending fell while economists had expected growth.

HERERA: One of the pillars of the president’s agenda is growing the economy. And yesterday’s GDP number showed a bounce back from a sluggish first quarter.

As Steve Liesman tells us, when it comes to a growth effect, there are ways the president could he help and ways he could hurt.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Just two quarters into his presidency, how much credit can President Trump really take for the economy? Economists say not very much. There could be some ways on the margins he’s helped and others where he may have hurt.

Most economists view the better second quarter growth numbers as a bounce back from the weak first quarter and say these are early days for the president to influence the economy.

BETH ANN BOVINO, S&P RATING SERVICES: In terms of the impact of the presidency, you know, our impact had been around actually before the election was around for 2018, around a little over 2 percent, about 2.3, now, it’s 2.1. So, I don’t want to blame the president for that, but I could say nothing’s has changed much.

LIESMAN: Bruce Cashman from J.P. Morgan says the U.S. has actually been an underperformer globally, maintaining its 2 percent average while the rest of the world has accelerated.

Here are some of the potential positive and negative effects economists are citing. The positive include deregulation, stock market gains leading to wealth effect and maybe some addition to the consumer spending, a rise in business and consumer confidence, along with some potential increase in business investments. But the negatives are policy uncertainty, the ACA repeal failure, which has pushed back expectations for tax cuts. Immigration and trade are two policies of the Trump administration not well-liked by economists.

The end of rising regulatory costs under President Obama could be having a bigger impact than any actual deregulation by the president. Business spending did go up in the second quarter, but it seems more tied to mining and rebound in oil prices. Taking out mining in the second quarter, business spending growth actually declined, according to work by macro economic advisers.

Economists of both parties agree. The effects of confidence of higher stock prices, they can be gone in an instant. If the president’s going to have a real impact on economic growth, it will come from legislation passed by Congress. That so far has proven elusive for the president.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

MATHISEN: One thing that the Wall Street experts are pointing to as a possible external issue for growth and for stocks is North Korea. Today, Secretary of State Rex Tillerson said stability is key.

(BEGIN VIDEO CLIP)

REX TILLERSON, SECRETARY OF STATE: We do not seek a regime change. We do not seek the collapse of the regime. We do not seek an accelerated reunification of the peninsula. We do not seek an excuse to send our military north of 38th parallel. And we’re trying to convey to the North Koreans, we are not your enemy. We’re not your threat, but you are presenting an unacceptable threat to us and we have to respond.

(END VIDEO CLIP)

MATHISEN: John Harwood joins us more — with more.

John, what was the secretary’s message overall there?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: The overarching message was we want to talk. We want to negotiate. This has been a rolling crisis across multiple administrations that’s gotten worse over the last few months and we’ve seen some displaced saber rattling, moving military assets, exercises, that sort of thing.

But this is Rex Tillerson at a moment where concern is rising, stepping in and saying, let’s talk about what we can do to defuse the situation. That’s a different tone.

HERERA: It was a very blunt. Does it change though the administration’s policy?

HARWOOD: Well, not fundamentally yet, although there was a nuance difference he offered. He said, we don’t blame China for this situation.

Remember, President Trump said in the beginning of his presidency, it will be easy for China to solve this problem, and then met with President Xi and subsequently said, well, they tried, but they couldn’t get it done. Just over the weekend, in his frustration, he said that China had not done anything but talk.

Now, this is Rex Tillerson trying to remove the idea of blaming China from the equation because he’s hoping to engage China in those discussions, negotiations that we would like to have.

MATHISEN: What’s the view in Washington or your view for that? Are we at the crisis point? And when could this issue begin to affect either investor psychology or maybe more dramatically, the U.S. economy?

HARWOOD: Well, this has been going on so long, Tyler, it’s hard to say when it crosses the line and becomes a crisis that is unavoidable. However, we are getting closer to that point without question.

One significant possibility is that if we do, in fact, use military force, that would be unpredictable, uncertain in the scope and intensity and duration. It would subject both American troops and the South Korean population to attack from the North. That could have a huge rattling effect on confidence in the U.S.

The second thing is, if we decide to sanction China with targeted tariffs on them as a way of pressing them to help on North Korea, they could hit back, in particular at the agricultural sector and the aircraft industry.

MATHISEN: All right. John Harwood, thanks very much. Appreciate it.

HERERA: Lumber Liquidators moves back into the black, and that’s where we begin tonight’s “Market Focus”.

After facing more than two years of financial struggles stemming from a product scandal, the flooring retailer said it returned to profitability. Sales also cleared street targets, thanks in part to a wider product assortment and improved marketing. The results were well-received. The shares took off. They rose nearly 36 percent to $33.59.

Under Armour slashed its full year sales outlook after reporting quarterly revenue that narrowly beat street estimates. The athletic shoe and apparel maker also reported a smaller than expected loss and said it would cut 2 percent of its workforce as it works to restructure its business. Shares fell more than 8 percent to $18.30.

Lower equipment sales caused revenue to fall and miss expectations at Xerox. The document management company did however beat profit estimates, and that sent shares higher by almost 6 percent to $32.46.

And the grain processor Archer Daniels Midland said weakness in its oilseeds processing division led that company’s lower — to that company’s lower than expect sales. Profit came in ahead of estimates and the company noted that it’s aggressively managing costs and capital. Shares finished up more than 2.5 percent to $43.30.

MATHISEN: The U.S. government is reportedly close to finalizing a deal now with Boeing to buy two of its aircraft for the administration’s next Air Force One jet fleet. Earlier this year, President Trump criticized the high cost of building a new Air Force One and according to a report by the news site “Defense One”, the Air Force will receive a pair of idle jetliners at a discount. Boeing shares were off 1 percent at $239.44.

Blood testing start up Theranos has reached a settlement with its former partner Walgreens. Under the confidential agreement, Theranos said Walgreens will dismiss the suit against Theranos with no finding or implication of liability. Last year, Walgreens sued Theranos, alleging that the start up breached its contract. Walgreens shares were fractionally higher, ending the day at $81.13.

Meantime, Snap, the parent company of the messaging app Snapchat, will no longer be eligible to join the S&P 500 due to a new rule. The index proprietor said it won’t allow companies that issue multiple classes of shares to list because of voting inequalities between shareholder classes. Under Snap’s current stock structure, it doesn’t offer any voting rights. The new decision does not impact existing S&P components that do currently have those several shared classes. Snap shares down 4 percent to $13.10.

And Sprint reported its first profit in three years. The phone carrier cited cost cuts and an increase in subscribers. Revenue also beat street expectations. And as for Sprint merging with another entity, the company said it has had discussions with many parties. And an announcement should come in the near future. Shares popped 11 percent to $8.87.

HERERA: Coming up, America is a wash in egg. And that’s no yolk. Right, Jane Wells?

(BEGIN VIDEO CLIP)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, which came first? The chicken or the egg. Record low egg prices have producers scrambling for profits. Up next, we have the dirt.

(END VIDEO CLIP)

(MUSIC)

MATHISEN: Bird flu drove up egg prices a few years ago, but now, there’s an oversupply and that has sent prices lower. In fact, this year’s summer prices, the lowest since 2006. There is one exception. Cage free eggs are much more egg-xpensive.

But as Jane Wells tells us, even that’s not helping egg producers.

(BEGIN VIDEOTAPE)

WELLS (voice-over): Egg producers and consumers are playing a game of chicken over prices. And consumers are winning.

CHRIS NICHOLS, CHINO VALLEY RANCHERS: Last year was a bad year for us. We lost a lot of money.

WELLS: America is awash in eggs. There’s a glut two years after prices skyrocket with avian flu killed tens of millions of birds.

NICHOLS: We had a lot of farmers put chickens back in. In fact, too many, and now, we’ve got an oversupply.

WELLS: It’s really bad for producers like Chris Nichols who runs a cage free operation in California called Chino Valley Ranchers. These eggs cost $1 to $2 more per dozen than conventional eggs, and people aren’t buying them.

NICHOLS: We’ve had to reduce our over-inventory. You know, we should get a certain price, and we’re having to discount it below my production cost just to get it out the door.

WELLS: He has about three quarters of a million chickens, but this year, he’ll reduce that number 30 percent until demand bounces back. And despite promises by retailers and restaurants to convert to cage free, Nichols says some of them are starting to change their minds and that’s no yolk.

NICHOLS: If that happens, I believe that all the rest of the players will follow suit. Unless they truly believe that cage free is the future.

WELLS (on camera): Adding to the problems in the supply and demand equation, after the avian flu outbreak, many food manufacturers changed their recipes to use fewer eggs and at the same time, because of improved genetics, hens are more productive than ever.

MATHISEN: I’m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody, and we’ll see you back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2017 CNBC, Inc.

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